Yen options dealers struggle to hedge intervention risk

Banks are finding it hard to risk-manage the exotic yen options structures that hedge funds are using to bet on interventions by the Bank of Japan, dealers say.

The trades – reverse knockout (RKO) calls with barriers set above the level where the BoJ is expected to step in – flip dealers’ volatility exposures at precisely the moment intervention fear makes hedges most expensive.

These include American barriers, where the trade knocks out completely as soon as spot breaches the level.

“Those